When the first uttering of the word 'taper' by Ben Bernanke occurred, EM markets took it in harsh, as rapid capital outflows ensued in vulnerable nations' equities and currencies. When all the carnage was fresh, Morgan Stanley dubbed a group of the most vulnerable EM economies as the 'Fragile Five', with them namely being: Brazil, Indonesia, India, Turkey and South Africa. The said countries are mentioned to be as so, due to domestically undesirable, fiscal and monetary conditions. Among these condition included widening current account deficits that were incurred alongside the sentiment of a tightening US Federal Reserve, political uncertainty and poor fiscal policies.

Dotted Lines Represent First Phase of 'Taper Tantrum'

Where are the fragile five currencies now? Still largely as a collection losing value against the broad USD rally, after the initial shock. It's quite noteworthy that as markets shift from being liquidity driven to fundamentally driven, the previously closely-linked relationship between the five, are now becoming progressively weaker as domestic factors become increasingly dominant in terms of the pricing of the respective currencies.

The Rupee: Not So Fragile Anymore

Indian Equities Depict a Similar Story of Outperformance

India CAD Bottomed at Historical Extremes

INR: Post taper tantrum,the INR has not continued to depreciate as its fragile peers has. It instead bottomed out at the end of August 2013, and appreciated from then on. This relative strength is one I expect to continue, as the previously bleeding India current account is making a turn-around; the chart above by Nomura depicts just that. From the currency aspect, it's clear India is the winner. If we use the five countries' equities as barometers of economic resilience in today's macro environment... India's the sweetheart yet again, prevailing on top, starkly outperforming the other four countries.

EUR/INR Should Progress to be a Continued Trend

Helped by PM Modi's decisive and clear political strategy alongside the RBI to lower inflation, India should continue to see a consistent inflow of foreign investment which should help spark the INR to trade at stronger levels. Additionally, lower oil prices should aid the INR to gain ground, as pressures on India's terms of trade is alleviated (38.5% of India's total share of imports is of oil). The fact that the USD can continue to gain materially should not be ruled out, although judging from the gains it's had so far, it seems the majority of the adjustment is nearing its final stages. The USDINR would prove to possibly continue a moderate rally in Q1 2015, funding a long-INR view via EUR as the funding currency is also attractive, as the ECB is highly likely to stay in easing mode. Technically, a EUR/INR under 80 should remain to be reason to short along with the currently prevailing downtrend, to target 72 by Q3 2015. A short on a pullback towards the 79.00-50 area with stop at 81.00 to target 72.00 would be the ideal trade via spot.

Weak Indonesian Trade

USDIDR Trading At Historical Highs

IDR: Indonesian primary export growth remains weak and sluggish versus other Asian peers. A large majority of the weakness is blamed on subdued coal, palm oil and rubber prices down an average of 30% since levels sighted in January. Occurring concurrently, domestic demand for foreign products increased in the same time period, which exacerbates Indonesia's terms of trade conditions. But this is ever-increasingly being priced-in. The major 'hot-button' factor for Indonesia at the moment is the issue of the removal of fuel price subsidies. The subsidies take up a significant portion of the government budget, and its removal is driven by the goals of redirecting public funds to infrastructural development and other reform policies. The prospect of subsidy removal has in the past, shown to cause nationwide protests, though national support for President Jokowi and his newly elected cabinet, should largely minimize the possibility of repeat of outbreaks of social unrest. Hopes for economic reforms to increase export competitiveness and domestic productivity should also help repair the damage done to Indonesia's terms of trade. Sell-side forecasts point to 12,500 for the USD/IDR for Q2 2014 a few months back, though the pair has reached 12,250, as of recent, rallying faster than expected. At current levels, technically there isn't too much room north, as 2008 GFC highs are being approached. Inflation is expected to come in at 7.0% as well in 2015, lower than Bank of Indonesia's 7.50% benchmark rate, which means that real interest is still existent, which may attract carry flows. Although not proving to be as strong a candidate as the INR for some gains in 2015, it isn't that much likely that the IDR deteriorate further from current levels, and a possible rally in the IDR should not be ruled out. (Mean reversion?).

Quite the Support on the USDZAR

CBRT Rates Courtesy Rabobank

ZAR: Among the 'fragile five' the ZAR would be one to continue to be fragile in 2015, contrasting the IDR and INR. Continued strikes in South Africa's mining industry is hampering growth prospects, with growth slashed -0.6% in Q2 from Q1. Although the South African central bank is expected to continue to its rate hiking path in 2015, inflation is largely expected to stay within its 3-6% target band, which shouldn't really induce positive ZAR risks until mid 2015. Technically, it's positioned at a long term trendline and 200SMA, which should provide decent support for longs to pile on. Trade: Long 11.000, stop @ 10.600, target 11.600.

Turkish GDP Courtesy Danske Bank

Inflation and Brazil's Central Bank Rate Courtesy CIBC

TRY: Turkey's quite in a muddy puddle at the moment with Erdogan's policies interfering with the Central Bank of Turkey's monetary policy aims. Erdogan wants rate cuts to spur growth... yet with double-digit inflation risks possible in the coming months, the CBRT is at a crossroads for a firm monetary policy direction. In terms of geopolitics, despite a softening Middle East risk premium, Turkey remains at risks from ISIS and the Kurdish, as well as neighboring conflicts. No clear technical signals, though the TRY is definitely in the weak bunch.

BRL: Somewhat similar story to Turkey, with inflation at its upper band, though it's worse at their side of the world, with the President in July saying that she can't 'explain why the economy is going so slow'. Economic confidence indicators remain largely stagnant and the BRL is feeling the heat, reaching 2008 GFC lows. A retest of 2.400 highs in the USDBRL, if valid, should prompt a rally to 2.55-2.60.

SUMMARY

Although the multiple phases of the taper tantrum has generated a strong EM sell-off across the 'fragile five' group, as we head into 2015, they are more likely to diverge in terms of direction due to domestic factors that will increasingly become important, external to Fed rate hike risk; this puts the INR as the leader of the pack, the IDR jutted in the middle, and the BRL, TRY and ZAR taking the bottom pile. Sit back, and let's see whether this all plays out!